Overnight, market expectations for Federal Reserve interest rate cuts surged sharply. The probability of a rate cut in September soared to over 90%, with an expected cut of about 55 basis points by the end of the year, implying at least two 25 basis point cuts. This change marks a substantive upgrade in interest rate cut expectations, with reasons behind it being markedly different from the past.
The previous rise in interest rate cut expectations mainly stemmed from the intangible and difficult-to-quantify concerns brought about by escalating tariff threats. This time, however, the deterioration of economic data has broken market expectations on a numerical level. Specifically, ADP reported only 37,000 new jobs in May, marking a new low since March of last year and far below the market expectation of 114,000. This indicates that tariffs have begun to affect companies' willingness to hire, leading to a loosening of overall employment market resilience. Additionally, the ISM services index fell below 50 (to 49.9), marking the first return to contraction territory in nearly a year. At the same time, input prices in the services sector remain high, indicating that business costs have not significantly eased. Considering that the services sector accounts for nearly 70% of U.S. GDP, a sustained contraction in this sector will weigh on overall GDP growth.
These two data points convey a core signal: the impact of tariffs has begun to reach American businesses, and the market is examining this situation based on disappointment in actual economic growth.
Next, there are several key time points and data worth paying attention to:
Data verification and market reaction: The U.S. non-farm payroll data to be released this Friday and the U.S. inflation data next week are crucial, as they are key to verifying whether market expectations are reasonable. If these data continue to perform poorly, the interest rate cut window will almost certainly open; if the data shows resilience, the market will quickly adjust expectations and experience a short-term correction. The dilemma faced by businesses: For traders, they can flexibly respond to the uncertainties of tariffs, going long one day and short the next. However, businesses cannot do this; tariffs have substantively impacted their hiring and operational decisions, far beyond just a cost transfer. The delayed effects of tariffs and Federal Reserve decisions: Current data only shows the preliminary impact of tariffs on the economy, with the true effects expected to emerge three months after tariff implementation, meaning that the delayed effects may intensively appear in July and August. A series of economic data in July and August, such as non-farm payrolls, CPI, PCE, ISM PMI, month-on-month retail, consumer confidence, etc., will become 'event-driven nodes' influencing Federal Reserve decisions.
When the market confirms that the impact of tariffs on the economy is not a 'temporary shock' but rather a persistent and cumulative negative effect, it will quickly transmit these expectations to the judgment that 'the monetary policy window will open ahead of schedule.'
After the data was released, Trump posted: 'ADP data is out!!! Powell, the 'big latecomer', must cut rates now. It’s unbelievable!!! Europe has cut rates nine times already!' Notably, this is the first time Trump has commented on ADP data; previously, he mainly focused on non-farm payroll data.
Currently, the global market trend has changed; trading logic has also shifted, and everything is undergoing new changes.
The time for interest rate cuts has been set! The time to buy the dip has also been set! Is everyone ready to welcome the arrival of a big bull market?